top of page

The economics of bad behavior

Two articles caught my attention recently:

https://www.channelnewsasia.com/singapore/legal-year-2023-chief-justice-sundaresh-menon-

noticeable-rise-breaches-ethics-professional-standards-lawyers-3187451


And of course, the other is the storm at SPH Media.


I have always believed that Economics should be both qualitative and quantitative and so, can the rationale behind bad behavior be justified and quantified?


Our behavior in life is generally driven by payoffs (be it in physical, mental, spiritual) and perhaps the actions of the people involved can be explained quite easily using physical payoffs and probability.


We assume that the players behind these acts are all rational, that is they are smart enough to figure out the payoffs (though not accurate to the point of 5 significant figures) and smart enough to choose the best actions based on their expected payoffs.


For a player to engage in questionable, borderline, or outright illegal behavior – he/her would have measured the pros/cons on a probabilistic scale:


Don’t commit act

Status Quo, low payoff (or even negative if one is fired for ill performance) with 100% probability


Commit Act and doesn’t get caught


Commit act and get caught

High payoff with probability 1 – X

Low/high (depending on the fine/penalty) penalties with probability X


Now expected outcomes is of course just the product between payoff and probability. Nett off, the expected payoff of committing the act is probably positive, and higher than the payoff of not committing act.


With this simple framework in mind, seemingly obvious solutions emerge:

· Increase the level of penalties

· Increase the probability of getting caught (by improving feedback channels, surveillance)


We all like to educate over canning children, but these aren’t uneducated folks. Like I said, they are rational players, very much educated folks.


Alvin

1 view0 comments
bottom of page